Collaborating at no extra cost

Collaboration is standard practice in chains, yet transaction costs often make it too expensive even so. Countless blog posts talk about the need for collaboration in the transport sector, in wholesale, in retail and with web stores. This isn’t about any old collaboration, but rather the collaboration among fellow entrepreneurs. They need to share their trucks, warehouses, stockpiles and product ranges. That is necessary in commerce and retail if you want to get your customers the newest products quickly and effectively. It’s also necessary if you don’t want to be stuck with dead stock every time you make changes in your product range.

Information about the supply and demand in the chain is shared to ensure the perfect delivery, just in time. In practice, it’s harder than it sounds.

Transaction cost

Experts point to the lack of collaborative skills and the absence of any distribution codes for the shared benefits as the greatest obstacle.

One fundamental problem consistently remains out of sight, however: the costs of reconciling the ‘little pieces in the chain’. That results in transaction costs – and those are high.

All those little just-in-time deliveries lead to purchase orders, consignment notes, goods receipts, and invoices, not to mention huge amounts of product data that need to be entered into the information systems in the chain. All of which need to be processed first.

Transport

Collaboration in the transport sector is necessary to achieve more sustainability in transports over longer distances and for a clean urban distribution on the short trips. And preferably at lower costs. Multiple partners share their transports, thus dividing the transport chain into small pieces.

If you transfer a pallet to another carrier, you will need to exchange the information about the shipment, an invoice will need to be sent once the receivable has been registered, and finally, the payment will need to be processed.

With the current systems and processes, that will cost anywhere between €50 and €100 per transaction. That leaves few if any benefits to be divided up. Which means it hardly makes sense to work together in the logistics chain. Transaction costs are standing in the way of collaboration.

Friction

To encourage collaboration, we need to think of a solution for those high transaction costs. To that end, three conditions will need to be met: data will need to be standardised (i.e. data alignment), processes will need to become paperless, and there will need to be a smart party to settle all the accounts.

This presents an opportunity for the banking industry and its service providers. Transaction costs lead to friction, and that friction forms an obstacle to the urgently necessary collaboration in chains.

Basically what we need is kind of a public-transportation smart card in commercial supply chains. Who wouldn’t want that?

Walther Ploos van Amstel is Associate Professor of Logistics aan de Vrije Universiteit Amsterdam